Jul 24, 2009
Executives
Logan W. Kruger - President, Chief Executive Officer Wayne R.
Hale - Executive Vice President and Chief Operating Officer Michael A. Bless - Executive Vice President and Chief Financial Officer Shelly Lair – Vice President and Treasurer
Analysts
Kuni Chen - Bank of America Securities Brett Levy - Jefferies & Company Justine Fisher - Goldman Sachs Timothy Hayes - Davenport & Company Mark Liinamaa - Morgan Stanley Anthony Rizzuto - Dahlman Rose & Co. David Rosenberg - Oaktree Capital Management
Unidentified Company Representative
(Call starts abruptly) whether as a results of new information, actual events, future events or otherwise. In addition, throughout this conference call we will use non-GAAP financial measures, reconciliations to the most comfortable GAAP financial measures can be in found in the appendix for today's presentation which is available on our website.
I'd like to introduce Logan Kruger, Century's President and Chief Executive Officer.
Logan W. Kruger
Thank you, Shelly. Good afternoon everyone and thank you for joining us.
We continue to focus our efforts on preserving the company's value and welcome the opportunity to report on our progress. So let's get started and lets move on to slide number four.
I'll speak about the marketing some detail in a moment and Wayne will also make a few comments. Suffice to say that we do believe the situation has stabilized over the last few months in most regions of the world and in certain end used sector.
I need to emphasis that apart from China we cannot point to any data that show a dependable reduction in growth. Consistent with what you have heard from others in our sector and in the global industrial world generally, we have witnessed a decelerating rate of decline and in certain areas what appears to be a bottom.
That said, we do not believe the industry supply response had been sufficient to match the current rate of global demand. And this situation has been exacerbated recently by restart in China and even some delayed curtailments in Europe.
I will provide more detail in a moment. Against this backdrop Century has had a healthy and successful quarter.
Most importantly, and not to be taken the granted especially in times of stress in general, all our plants performed ultimately. Safety metrics were excellent, and the operations ran efficiently.
These results as you would expect all a real credit to our management teams and to the employees at our plant. These are more impressive and our teams that holds low and Grundartangi in Iceland had reduced the ongoing cost of the operation.
They have demonstrated their performance consistently over the last few months and proven that they can run the plant safely and reliably at these lower cost levels. As you would understand, certain actions that they have taken are somewhat temporary and that is that the plant cannot be run in perpetuity at the lowest spending levels in certain areas such as CapEx and maintenance.
But critically in this environment which we find ourselves in we believe these operating levels can be achieved for at least the next 12 to 18 months. Wayne and Mike will provide some more detail for you.
After a significant effort we concluded the new long-term power contract for Hawesville, on what we had been waiting for the last several years. The contract provides cost based trial to hold through 2023.
Importantly, in the near-term the agreement mitigates Century's financial risk in today's environment. Wayne will speak to those matter in more detail.
We have made good progress on the Helguvik project during the quarter. Modest construction and engineering activity continued on visiting the site one can now see a smelter taking shape.
We've also advanced on the project including discussions with key suppliers such as the Iceland smelter companies. We continue to believe that Helguvik will be a world-class smelter and an excellent investment for our shareholders in the future.
In this way, we are pushing forward with determination. But I must remind you only in line with our requirement that we will not jeopardize the well being of the company as a whole.
Mike will provide more detail but you will note, the cash flow performance during the quarter was favorable to our expectation. These results came from the hard work of our operating teams and we continue to work on strategic initiatives which will put the company on an even firmer foundation.
We hope to be in a position to report on some of these few during the coming month. Let's move on to slide number five.
The LME stock price have been from $1,488 per ton for the second quarter of 2009 and has recently increased to above $1,700 per ton. This is just from low of $1,250 per ton in just February of this year.
The most recent spot the alumina price in the Pacific basin was cost at $241 per ton of alumina up from the less than $200 per ton in the first quarter. In the U.S.
and Europe we have seen signs of stabilization as we believe de-stocking has reached the bottom. But demand has yet to show any meaningful indications of growth.
Recent economic data of China demonstrated that this stimulus plan which focuses heavily on investment and infrastructure is having the desired effect. Chinese GDP grew at the pace of 7.9% for the second quarter and industrial production was up by 10.7% last month.
These growth levels are lower than we had seen from China in recent years, but impressive in the lack of the global economic recession. So we move on to slide number six; with the rising metal prices over the second quarter new capacity curtailment had essentially come to a halt.
In fact, as indicated by the dotted boxes in the slide significant restarts are occurring in China where producers continue to enjoy a $300 plus premium per ton to metal sold elsewhere in the world. Curtailments now stand at approximately 5 million tons of production as compared to about 6.7 million tons of production at the end of quarter one 2009.
Most of the decrease is a result of Chinese restarts, as well as modern restarts in Germany and New Zealand. The Chinese government has announced that it will no longer be stock piling additional metal.
Accordingly, this temporary source of demand has disappeared and any real growth going forward in aluminum demand from China will likely be satisfied with increased local production. We continue to believe the market is rather supplied and further capacity curtailments most likely in the western world are required to bring supply in line with current demand.
Moving onto slide number seven. LME stocks have continued to rise, but as you see from the slide not as rapidly as in recent months.
We believe this is indicative of our some stabilization in demand and the end of producer de-stocking. However, I would note the inventory levels are at 4.5 million ton.
A meaningful portion of these inventories are believed to be tied have been financing transaction causing some local attachment and in particular driving the U.S. metals premium $0.05 per ton range the highest level since late 2006.
We believe these significant warehouse inventory levels will be an overhang on the market for some time to come. Moving on to slide number eight.
Inventory levels on a global are now 69 days of global demand. A level we haven't seen since the early 90s when the collapse Soviet Union drove significant inventories into the warehouses and the market was in a deep trough.
This chart indicates that current prices are somewhat above the level justified by current inventory levels based on the historical relationship. Given our view of the continues outlook of supply basis of the market absent further capacity curtailment, we also believe that the current price levels are not supported by the fundamentals and pricing risk remains to the downside.
Wayne will now produce -- some details on the operations.
Wayne R. Hale
Lets move on to the next slide, thanks Logan. As we noted we had good quarter from the operations perspective and made excellent progress on several fronts.
Looking first at Ravenswood there really has been no change. The small group of employee downside continues to keep the plant safe, secure and in good order.
Based on a situation at the plan we have agreed with United Steel Workers to extend existing labor contract which we had already extended 90 days to August 31, 2010. As you no doubt saw in our press release the new power contract for Hawesville is complete.
Given the importance of the agreement and its long term nature we think it is important for investors to understand the details of the key areas of supply in term near risk protection and operational flexibility. First the power supply contract itself is with Big Rivers Electric Corporation.
The power is generated at the same facilities that have been producing historically, these plants had until the completion of this new arrangement been operated by E.ON U.S. under long term leases with Big Rivers.
Our new contract with Big Rivers expires in 2023, the rate we pay is based on their cost of production. The contract requires Big Rivers to sell on our behalf any power that we do not take if we are not operating Hawesville at full capacity.
We are generally entitled to any profit on those power sales but are on the hook to Big Rivers if the power cannot be sold and/or if the selling price of the power is below cost. Secondly, if we have also entered -- we have also entered in to an agreement with E.ON which has two parts under the first E.ON has committed approximately $80 million which they will contribute over the next 18 months to reduce our power bill to Big Rivers, assuming we run Hawesville at the current production rate which is approximately 3.5 production line, potentially all of this $80 million in production credits will be used in our power cost per megawatt hour will be about the same as it has averaged to this year to-date which is a very attractive rate.
To the extend we run Hawesville at a lower production rate and the entire $80 million is not spend, then at the end of 18 months E.ON will contribute half of the remaining amount into an account which will be used to reduce the fuel portion of the power cost thereafter. So this part of the E.ON agreement encourages us to produce at Hawesville in the near term by keeping our power cost low.
The other part of the agreement with E.ON curve is the risks from the Big Rivers contract over at least the next 18 months. As with most power contracts our deal with Big Rivers is a take or pay for Hawesville's entire power requirement at full capacity.
As I said, they have an obligation to attempt to sell power we do not require and we're entitle to the profit. However, in the current market environment the market price of power in this region is below Big Rivers estimated cost and we would thus have a financial obligation to Big Rivers to make up that difference.
Under this agreement, E.ON will assume our position in this regard and pay the deficiency if the price received for the unused power is less than the cost. They are also entitled to the profit if the markets impact the other way.
We have eliminated requirements to repay E.ON funds which they advance under their production credit over this backdrop arrangement; we will have a contingent obligation to pay to them any amount in access of $80 million. Repayment obligation will begin after the protection period ends generally after the end of 2010.
We would only have an obligation to make a repayment in any month during which we are operating and the average LME price is above an agreed level. As for our level is more than 50% higher than the current LME price.
Moving on, as Logan summarized we have had excellent performance from the plants. Mike will detailed our new cost estimates.
At Hawesville, the produce cost have come from a number of fronts including lower alumina costs from Gramercy and more efficient power usage and improvements in most other areas of plant consumption and operation including raw materials, maintenance and supplies. As Logan noted, some of these actions such as the deferral of maintenance activities have limited lives, but we are convinced we can run the plant in this manner for at least the balance of 2009 and '10.
We continue to analyze the pros and cons of curtailing additional capacity at Hawesville and expect to form some conclusions in the visibly near term. As I said, we have had good performance at Gramercy and St.
Ann bringing in the cost of alumina to Hawesville down by almost 20% since earlier this year. We continue to talk to our partner about the long term status of this business Move on to next slide.
We have not seeing much change at Mt. Holly discussions with the power supplier have not yielded any tangible results.
In addition unlike Hawesville and Grundartangi we've disappointedly have not seen any cost reduction at Mt. Holly.
We are discussing the situation with our co-owner who is the operator of this plant. At Grundartangi and as in Hawesville the team has done an outstanding job in improving safety and bringing down costs to what was already a world class facility.
Regards to markets Logan covered the highlights, looking at little more closely there are signs of improvement in some of the markets with better trends indeed such as housing starts and new car purchases. However, we have a long way to go and are running the company in that bane.
Producer inventories remain low and this fact will obviously improve conditions further once demand actually begin to pick up. On the physical side, metal availability remains tight in many markets due to a variety factors including the commitment of a large potion of aluminum warehouse inventories to financing transactions.
We've seen the evidence of this situation in rising physical premiums. Now I'll turn it over to Mike who will discuss the financials.
Michael A. Bless
Thanks Wayne very much. We are on slide 11 now.
And as usual if you could have in front of you the earnings information, the financial information that's attached of the earnings release that will be helpful because I'll be referring to it as I go through my comments. So starting at top with the income statement with net sales first let's talk about the components of the change in net sales, and in that context talk about the market for a second Logan gave some of these data.
If you look at the cash LME price Q1 to Q2 all of my comments is usual and as you can see on the slide it will be a sequential comparison of Q2 to Q1. The actual cash LME price improves on average by 9% Q2 over Q1.
With a one month lag it was about flat and as you know, most of our sales and costs are priced on a one month lag. We do have one sales contract in the U.S.
that's priced on a one quarter lag and obviously as we take in capacity out of the U.S. that contract has become a larger percentage of our sales.
To give you a sense it represented about 15% of our sales, our unit sales volume in the first -- in the second quarter. If you look at the LME price on a one quarter lag obviously you're looking at Q1 versus Q4 of '08.
The average price was down 26%. So when you put that all together if you look at our unit average realized prices in the U.S.
it was down about 3% and that's the reason of that one contract. If you look at Iceland, unit average realized prices are flat as you would expect.
Turning to volume domestic you can see these data by the way at the end of the financial information of the very last section, operations data as called. Domestic obviously shipments down significantly due to capacity we took out in Q1.
If you adjust for that capacity on that thought-for-thought basis, we were flat on a per day basis shipping Q2 to Q1 versus Q1. In Iceland then you can see shipment volumes were up 1% as reported, but flat per day, the second quarter have one more shipping day than did the first quarter.
And as Wayne said, and we were remain really pleased with the performance of Grundartangi to shift again at an average annualized rate of 276,000 tons, which as you know is well above the right capacity of that plant. So if you put the pricing and shipping volume data together you're looking at sales again on back on slide and you can see it on the financial information.
Net sales is down 16% in dollar terms, on those lower shipping volumes and are relatively flat as pricing environment. Walking down the income statement to gross profit; you can see gross profit Q2 over Q1 improve by $67 million.
That's when the sales declined during the same comparison of $35 million. So let's talk about the major components.
The largest components of that delta you -- if you had a chance to read the earnings release you saw in the first paragraph there. We had a lower cost or market credit this quarter of $27 million roughly.
As you may recall last quarter we had a charge for LCM of 2 million. So you put those two together and net produced to $29 million swing in gross profit Q2 over Q1.
Talk about some of the operational items that added to that gross profit improvement. As Wayne said Gramercy had a terrific quarter and the cost of alumina delivered to Hawesville obviously, improved by $6 million Q2 over Q1.
U.S. power cost improved by $3 million, the only cost that went the other way as Wayne said was that Mt.
Holly, where the cost was unfavorable by $1 million Q2 over Q1. Raw materials across the company were favorable by $3 million and again as Wayne said we had terrific operations performance at Hawesville and Grundartangi for which the operating costs in aggregate improved $12 million quarter-to-quarter.
Moving down to income statement, other operating expense of $9 million just to remind you the cuts on this line are the curtailment costs related to Ravenswood, I'll go here from now on instead of costs of good sold as one as the plant is curtailed. 6 of that $9 million related to the expense that we booked for the payments that we're going to be making to finance for the settlement of the alumina contract volumes for '09 obviously that were meant for Ravenswood.
Loss in four contracts as you can see $3 million there that item is primarily result of market to market the un-priced portion of the power for Hawesville under the old power contract. We're studying right now specifically how we will be accounting for the new power contract at Hawesville, but what we have determined today that the series of contracts will indeed be accounted as a derivative and thus will have amounts flowing to this line as we mark those arrangements in market, obviously more on that when we report in Q3 earnings.
Couple of other items on P&L equity earnings you can see $4 million profit this quarter versus the loss quarter, to remind you that the loss last quarter was primarily produced by an inventory adjustment debt of $3 million at the BHH, as you know the BHH is at our 40% down than plant in China they have no inventories adjustment this quarter. A big portion of the $4 million profits this quarter was again our share of that $6 million payment we made to St.
Ann so obviously we own 50% of that we get 3 million back in our equity earnings. Effective tax rate as you can see was close to zero as we have been telling you in the U.S.
our tax rate will be zero even though we have booked losses in the U.S. We can't provide a tax benefit in the U.S.
because we have full valuation allowance differed tax as partner in the U.S. So that will be zero for the time foreseeable.
In Iceland we provide our taxes at 15% and so again on the reasonably modest base of taxable income in Iceland we're providing at 15%, so all that was down to a relatively small effective tax rate as you can see. Couple of other items before we move on average shares for the quarter as you can see 74 million common, 15.4 million preferred consistent with the balances at the end of Q1 and no movement appreciable on the share count over the quarter.
As you can see the preferred shares this quarter again are not included in the calculation of EPS because we are doing so with the anti dilutive. If we move, before we move to the next slide just look towards the end of the financial statement data at the cash flow information.
Just the couple of items of note CapEx for the quarter came and 3 million as expected and spending on the Helguvik big project again consistent with our expectations came in at $6 million. We can move on to slide 12 please.
Just a quick look at the changes in cash over the quarter. We exited Q1 with $267 million of cash on the balance sheet, as I said aggregate of Helguvik spending and sustaining CapEx with 9 million.
We had another resource capital for working cash -- pardon me, for working capital during the quarter that was due primarily to the sale of the last volumes of alumina that were originally intended to be used at Ravenswood. And as you can see importantly on the chart cash loss from operations slightly under $40 million this quarter, if you go back to last quarter that same number was 61 million.
I would note that we make no interest payments during this quarter are roughly $11 million semi annual interest payment on the two bonds are due in February and August so obviously you will see that $11 million amount in Q3. Moving on to slide 13; just a quick update our operating costs and some of the other forecast items to help you in your modeling.
First the smelter cost in the U.S. these estimate now include the net price of the power bill that we will paying under the new contract at Hawesville.
So at a range of recent LME prices in the U.S. our cash cost us in the range of 1750 to 1800 and then Iceland, Grundartangi of course 1350 to 1450.
Curtailing cost at Ravenswood consistent with the forecast we've given you before about $15 million for the balance of this year, something under $30 million next year and then as you know and as we've said before they come down significantly thereafter. SG&A costs $6 million of cash costs continue to be a good estimate for the base cost of running the company.
Obviously the P&L will show a larger amount due to some non-cash items that we accrued like pension cost and others. In Q2 and in the current quarter Q3 and for the next quarter or two at least we'll be incurring some amounts above this, largely due to professional fees as we work on our various restructuring activities and those could be a couple million dollars a quarter for the next couple of quarters.
So couple of that items are CapEx no change to the estimates we've given you previously, something under $10 million for the balance of this year and about $15 million in 2010. And lastly, no again no change in the estimates about $10 million left to go this year, $5 million the next year for the balance of the differed payments to suppliers.
I'd note importantly and Logan made some comments on the status of Helguvik. But these amount don't include actual construction activities as to 2009 and we will be continuing to work that and formulate that and we'll hope to have something for you to update you on those here maybe as early as next quarter.
And with that, I'd like to turn it back to Logan.
Logan W. Kruger
Thanks Mike. We are on slide 14.
We have covered most of the points already today. However, I think it's important to emphasis that while we note the improving industry trends about which we have spoken, we remain unconvinced that the thought forward will simply be up and to the right.
So we are operating this company and contemplating various strategic actions in that context. The cost of getting these critical assumptions wrong is just to make our shareholders to bear.
We've made real progress in improving the company's liquidity profile through cash raising activities earlier this year and now by a real reduction in our operating costs. We remained hard at work, on our restructuring efforts and the further low the cost base and taking risk out of the company.
We hope we'll have some access to communicate with you in the near term on this area. Lastly and most importantly we are absolutely committed to developing the Helguvik project, and restarting major construction activity as soon as it is practical.
On the next slide, for your interest you can find the recent picture of the construction site at Helguvik smelter. With that I'll turn your questions, operator we are ready to take questions.
Operator
(Operator Instructions). Our first question comes from the line of Kuni Chen with Bank of America Securities.
Please go ahead.
Kuni Chen - Bank of America Securities
Hi good afternoon everybody.
Logan Kruger
Hi, Kuni.
Kuni Chen - Bank of America Securities
A couple of questions here. I guess just first of all on the cost side, obviously probably cost reductions are not sustainable and capital spending and maintenance and what not need to ramp up over back to normal levels overtime.
But can you talk about sort of what cost improvements you have been able to get that you think are sustainable? Others in the industry are changing spec from on carbon anodes and things like that.
Are those the type of projects that you have been looking into?
Logan Kruger
I think Kuni thanks, its Logan for the question I'll ask Wayne to dig into some more detail for you. But as we've said.
We believe that the position of our cost performance is sustainable from the next 12 to 18 months. Obviously, after that you have to review your position.
Wayne you want to add color to this.
Wayne Hale
No, no. I'd just used an example that or say Hawesville or say the cost reductions that has been made there maintenance and supplies in some cases may not be sustainable only make the 14% of the overall cost reductions.
So the rest of those are in line with material cost reductions and the hard work that the guys are doing at the plant.
Logan Kruger
And certainly we've always looked at the specification of the supplies your using an example on carbon, that's an area that we continue to work on. Obviously we have to be somewhat careful about the end-product that we deliver to our key customers.
Wayne Hale
Just on a point and overall, we've reduced their costs as well and their cost profile of reduction they have made some changes and reductions in the maintenance area but not significant there have been, major reductions in carbon and indirect cost and of course labors as well.
Kuni Chen - Bank of America Securities
Okay. And then on Helguvik, there is some language in the release that says that you may contemplate and restart a major construction work there.
Can you just give us maybe some sense as to what sort of financial structures you're looking at to get back all in again and perhaps some deals on how the other sub structure may look down the road?
Logan Kruger
I think Kuni, we're very pleased about a number of things on Helguvik. First of all, we can tell you that today it was confirmed by the European Surveillance Authority that the investment agreement is now been agreed to buy them and both ourselves and the government of Iceland will be signing that.
And that I think is significantly reduces any risk in any new project anywhere in the world. The second thought Wayne and the team on the project side have reconfigured the project into four phases of 90,000 tons each.
And we've taken advantage in our review of obviously, the reinvestment costs that are required now. And we've seen the benefit of having those lower costs as well as obviously the lack of new projects been developed in the rest of the world.
So on the potential structuring of financing those and I think Mike can add some comments on that if he'd like.
Michael Bless
Sure, Logan. Kuni it's premature yet although we're working diligently on it and to say the least to talk specifics on things like ownership structure that you're asking about.
But I can reiterate what we've said previously is that the financing package will have a couple of key elements to it. One is that the debt component of it and won't have recourse to the rest of the company's assets and that's the path we're pursuing.
And two the additional cash, any additional cash that Century would have to contribute certainly to the first phase that we're going to addressed would be minimal. And that kind of the context of the package that we're pursuing, as I said maybe as early as the next earnings call we'll be able to have some more detail for you on both that and the capital cost.
Kuni Chen - Bank of America Securities
Okay, great. And then I am sorry....
Logan Kruger
Well last comment Kuni, as you would you expect we're working on it very carefully and we're making sure we've got a lot of -- Europe and we will let you know as we these things develop. Sorry, your next question.
Kuni Chen - Bank of America Securities
Yeah just one last, and I'll turn it over. No doubt you mentioned sort of a need to take more risk out of the company going forward, then I'll turn it over.
You mentioned sort of a need to take more risk out of the company going forward given your sort of skeptical views on the business climate of ... can you dig into that a little bit more.
Is that just more capacity curtailments or there are other ways that u can look at creatively taking risk out of the company?
Logan Kruger
I think. Kuni, first of all I think our views for the market is not skeptical.
I think we're fairly balanced our views; we've noticed some improvements. But we've also noticed that demand is full subdued.
And it is the fairly large inventory hold in hanging over the market. We are not unhappy to see the higher prices.
But you're going to look at where the risk may remain and we believe that it still remains on the downside. In terms of taking risk out of the company, we're looking at always of taking risk out of the company.
And maybe Mike want to say -- add any additional to that.
Michael Bless
I mean, till we get the obvious one, as we've said; we are still looking at whether taking addition capacity that makes economic sense given the balance of risks and upside and such and so that we come to know conclusions there; the fact that we haven't taken additional capacity since the finest Hawesville that we curtailed in March, shouldn't mean to anybody that that's the final decision. And then we're continuing to look at all the other assets.
We are on a joint ventures in which we participate as we've said we're talking to our partners in both of those. So, I would say; Logan's comment is right on.
We're looking at that panickly to things that we can do. But you're right; capacity curtailment additional is right at the forefront.
Kuni Chen - Bank of America Securities
All right. Thanks guys.
Michael Bless
Thanks.
Kuni Chen - Bank of America Securities
Thanks for the good question.
Operator
Thanks. Next we will go to the line of Brett Levy with Jefferies & Company.
Please go ahead.
Brett Levy - Jefferies & Company
Hey guys.
Logan Kruger
Go ahead.
Brett Levy - Jefferies & Company
Can you guys talk a little bit about sustainability; what can you shutdown in 2010, what can shut down in 2011, and where is your liquidity. Can you talk about like the worst case scenario liquidity option?
Michael Bless
I'm not sure Brett, is your questions are pretty drive line. I mean, start -- let's try to first do it.
It's Mike. The first is; you asked where additional capacity we can take out.
And we'll just review what we said before in 2010 and 2011. So, as we said about 60% of Hawesville right now is required basically three of the side lines to supply an important customer that we have there, which contract expires at the end of the first quarter in 2011.
And so I think that's our major answer there as we've said at the other plants in the U.S; we don't have the unilateral ability and economically there to -- we've talked about this before to curtail, it's got to be is that whatever come a joint decision by ourselves and our partner there. So, that I think is the answer on that one.
Worst case; I'm not even sure how to address that question. But maybe we didn't ask it again to tell us what you're really looking for.
Brett Levy - Jefferies & Company
I guess my though is; in 2011, aluminum is still $0.75. Is this company still viable?
And my taught is that you going to actually close everything in this one; Iceland. And still on a cash flow positive.
Michael Bless
Yeah. As I think picking that number, your numbers.
I'm not get what is 1630. It does portray a continue cash requirement for the U.S.
operations. But as you know, from the numbers that you run yourself; obviously I think is self sustainable.
It's -- you have to look at that as you go forward. I think we've made significant improvements.
So again you have to look in each environment takes what you think is the future. But in near-term and pressed a little bit longer-term and decide how you run.
We're pleased with the progress we make. But your option is not out of our range of thinking, that depends on where you want to proceed the LME price.
Brett Levy - Jefferies & Company
And then there is some financial adjustments in 1Q that are positive, and 2Q that are negative. Can you take me through like your adjustments?
What's recurring and what's non-recurring? And just get me to a normalized number?
Michael Bless
I'm not sure as to whether other than need is the inventory items, plus there really wasn't anything. So it's just, it's LCM, you're familiar with the inventor accounting of course.
And while you have the -- I'm having out LCM reserve and when you have release an LCM reserve; that's all non-cash stuff of course. Those are the only items that we referenced.
Brett Levy - Jefferies & Company
Got it. If you guys at some point is -- LME, it's like a $0.79 right now.
Did you guys at some point wanted to buyback your bonds; could you?
Michael Bless
Yes, we wanted to buyback our bonds; could we. There's nothing that precludes us contractually if that's what your asking from buying back our bonds.
Brett Levy - Jefferies & Company
Right. It's not something you remotely think about that right now?
Michael Bless
Right now -- I would never say remotely, we think about everything. But we believe, right now given the balance of risks and opportunities and liquidity and right now it's not something that we're doing.
Brett Levy - Jefferies & Company
Okay. Thanks, guys
Michael Bless
Thanks.
Operator
And next we will go to line of Justine Fisher with Goldman Sachs. Please go ahead.
Justine Fisher - Goldman Sachs
Hey guys.
Logan Kruger
Hi, Justine.
Justine Fisher - Goldman Sachs
My first question; I know you've addressed these issues before and certainly and probably firms. But I just wanted to double check whether you're thinking is change on that.
And the first is the convert part in 2011. By the way, I'm running my numbers in the kind of dependent on aluminum prices.
You guys may have enough cash at the end of 2010 to potentially meet that put with cash. But what type of refinancing options might you look at?
Would you look at high yield that or to ... in the covert market or you're now thinking that for ahead yet?
Wayne Hale
We're thinking about it hard. And because two years ago, seen over last couple of years reasonably quickly.
And the answer not is not to give you the easy answer, because you said Justine, is any of the above. I mean, I think it's just looking at these three options and the financing markets are open right now unclear; what they are going to loot like in time in the future, but that convertible markets are open, the common stock markets are open.
We have the ability and to our adventure to raise additional debt. That could be done in the current market.
As you know all of our assets are unencumbered. And other than the first win that the revolver banks have on the U.S.
receivables and inventory. So we've got a lot of options that which we're looking.
And I think part of your question we're looking at a right now. As to whether we would have actual liquidity on the balance sheet to do it again as Logan just said; its entirely depended on ones view of the metal price.
But, in some reasonable scenarios what you said could be true.
Justine Fisher - Goldman Sachs
Okay. And then as far as the Grundartangi plant was concerned, I know you guys have said previously that issuing no debt potential encumbered by that asset is kind of a last resort (ph).
Is that still the case?
Wayne Hale
Yeah. I mean, I think it's clearly there.
And we think that -- and our advisors believe that something reasonably attractive, relatively attractive when all of these qualifiers in these market. 50 done.
Last resorts has the superlative. But it is something that we would probably leave until after we take there a bunch of other options.
Justine Fisher - Goldman Sachs
Okay. And than the last question; I'm going to throw this out, you may not willing to answer.
But I know that aluminum prices are clearly the big movers, but in the second quarter the operating loss was down in the single digit I guess. So, borrowing changes in aluminum prices, are there any other cost items that could drive your operating loss lower than that or current bend down, that has just voted the U.S.
operations and ... from the operations.
It's really going to be the aluminum prices that would drive would drive operating profit up or down.
Wayne Hale
I've done ... Wayne to comment as well as Logan, Justin.
I think the answer is we've driven the cost benefit we can through and we continue to look at them. But you're obviously that is a less available option.
But it doesn't mean we're not looking at that. And I think we will continue to look at them.
I think it is also ... and Mike ...
Michael Bless
Yeah, I think Justine, just if I could just reorient your question and maybe Wayne could answer it. I would prefer to look at rather than the operating loss, the cash flow because for example; the operating loss was made $27 million less this quarter by the release of that LCM reserve.
And that's a non-cash item. The cash impact of it close to this based on cash, which actually paid for that inventory what actually gets forward for finished products, but -- so I would just maybe reorient you little bit to the actual cash flow.
And Wayne, you want to ...
Wayne Hale
Yeah, I think the important point here is that all the teams have plans continue to look at cost reductions in some of the work, it's being done now, is trying to finish, which we won't see the true results from other source. So again, it's just impressive to see the ideal generation being done.
Justine Fisher - Goldman Sachs
Thanks so much. I appreciate it.
Michael Bless
Thanks, Justine.
Wayne Hale
Thanks, Justine.
Operator
The next question comes from the line of Tim Hayes with Davenport & Company. Please go ahead.
Timothy Hayes - Davenport & Company
Hey good afternoon, everyone.
Logan Kruger
Hi, Tim.
Wayne Hale
Hi, Tim.
Timothy Hayes - Davenport & Company
I just have one question, would you said that 13% of your sales on a one quarter like the alumni price, was that 15% adjusted to U.S. production?
Wayne Hale
Yes, 15% of the U.S. productions this passed quarter.
And you know that amount that percentage will change. The numerator is the same, but the denominator will change based on what our shipments are during that each individual quarter obviously.
But, yeah, this past quarter 15% of our U.S. shipments was at one contract that prices on a quarter lag
Timothy Hayes - Davenport & Company
Very good. That's all I have.
Thanks.
Wayne Hale
Thanks, Tim.
Logan Kruger
Thanks, Tim.
Operator
Next question comes from the line of John ... Please go ahead.
Unidentified Analyst
Yeah. Hi.
Just two quick questions. One is; can you give us the tonne shipped in the quarter.
And the second question is, in terms of the inventory adjustment. Was there an inventory -- I mean, I guess you have a lower cost of goods because you released this evaluation allowance was when was that allowance taken in the first place?
Was that in the prior quarter?
Logan Kruger
Yeah it was in two quarters ago. Fourth quarter last year
Unidentified Analyst
Okay.
Logan Kruger
And you're right. That's how it -- that's what it obviously resulted in the lower cost to sales.
And answer to your first question, I'll give you U.S. and Iceland, and we can add them up or you can add them up.
It's at the end of the earnings release, but the tonne shipped during the quarter in the U.S was 76,817; and in Iceland, 68,876.
Unidentified Analyst
Thank you.
Logan Kruger
Sure. Thank you.
Wayne Hale
Thanks.
Operator
The next question comes from the line of John Mazo with John Mazo ... question.
Thank you.
Unidentified Analyst
Thank you. In terms of market outlook you have which is realistic and cautious, what are the better ways to mitigate risks as you continue to operate the company.
Would you go back to hedging, what's the strategy of the past issue more equity or try to sell assets stakes to mitigate risk in the current climate.
Logan Kruger
I think John you've covered the field. I don't think there is anything that we particularly will on in on.
We look at the pricing are like it was realistic and cautious. I think we're pleased that the price has moved, but realistic about it in terms of how we deal with our cash flow liquidity requirements.
Mike pointed out our cash position is about $230 million. So it does give us some runway upfront; and as my colleagues will agree with me.
But the runway look from a 18 months plus. So we've got some time on our hands and we continue as Wayne has pointed to work on the cost side and our throughput side and our throughput side and other strategic options; I don't want to be too general, but I think that's the best way of answering your question.
Unidentified Analyst
Thank you.
Logan Kruger
Thanks, John.
Operator
The next question comes from the line of Mark Liinamaa with Morgan Stanley. Please go ahead.
Mark Liinamaa - Morgan Stanley
In your comments, you referred to some of the short-term financing deals that are linked to some of the LME inventories. Can you comment on the duration of those things and how you think that may play out over the next, I don't know, six months or so?
Logan Kruger
Mark, it's Logan. It's unclear how much is tied up in these basic.
But we do have really up-to-date information whether it's been somewhat difficult for people to liberate out of the warehouses metal on a short duration basis. So we hear that some people are tied up for a year taking as launch in the Grundartangi ...
less carry in that so. We haven't got access to a whereof financing basis.
But we've realized that if you look at the Midwest premium, and if you have a look across the ocean to the Japanese premiums as well, I think you've seen both go out somewhat in this period of time
Mark Liinamaa - Morgan Stanley
Would you have any sense of how much is actually unfettered with financing?
Logan Kruger
No, we don't know. Mark, I'd like to give you a number or that use but that I don't know.
But the evidence is that it's been difficult to get metal out of the warehouses at a short notice. And part of what's exacerbated in the problem are may be I'll just add the see, is obviously everyone run down their own stocks.
And so they one of act it metal at a shorter-term. So that's also driving the present situation
Mark Liinamaa - Morgan Stanley
Sure.
Logan Kruger
I don't know how much. But as you saw in our remarks, Mark, we believe there will ...hang for how long it's difficult to say.
But that's how the hang will be there for some period
Mark Liinamaa - Morgan Stanley
Okay. Thanks for that.
And just quickly, you talked about China restarts has been a problem, how are you thinking about China? Are they ultimately a long-term exporter neutral?
And can you comment on what has to happen to get the rest of the world to get it in the balance?
Logan Kruger
I think just if we split China into two periods, I think short and medium-term, I think China's ability to generate and that's makes on demand is more likely. They're producing at around 11.5, 12 million tons.
I think at this time is the estimate and has capacity up to somewhere between 17 and 18 million tons. So, you need growth in China should by nature of the business, but again cost will also determine that power of the number of other things which we saw just a year ago.
So you've got to think that short-term market, China is a bit of a .... Then you get into the rest of the world; then you'll obviously see that build up of inventories in the LME warehouse.
I don't know what the number is, but I suspect people talking around maybe a million tons plus of excess to demand supply at this point of time. I don't know.
Shelly, do you have any comments on it?
Shelly Lair
You saying outside of China
Logan Kruger
Outside of China
Shelly Lair
Yeah, 1 to even 2 million tons.
Mark Liinamaa - Morgan Stanley
Yeah.
Logan Kruger
Its difficult to guess, because there are indications of some demand pick up in certain areas, Mark.
Mark Liinamaa - Morgan Stanley
Great. Thanks for that and good luck.
Operator
Next question comes from the line of Tony Rizzuto with Dahlman Rose. Please go ahead
Anthony Rizzuto - Dahlman Rose & Co.
Thank you. Good after noon every one.
Logan Kruger
Hey Tony.
Anthony Rizzuto - Dahlman Rose & Co.
I had a question about Hawesville. Is there anything in or stipulation in the contract you have or new discussion that you preclude you guys from bringing in a JV partner?
Logan Kruger
Tony, like anything else, I don't we restricted. And it's one of the thing that you have to think about as you go forward.
And we know the projects good, it's well established, it's there, we know their working environment and the capital hurdle is reduced obviously as you would expect. But there is no restriction.
Anthony Rizzuto - Dahlman Rose & Co.
All right. Thank you very much Logan.
Logan Kruger
Thanks, Tony.
Operator
Next question comes from the line of Prakash Mishra with Morgan Stanley (ph). Please go ahead
Unidentified Analyst
Hi. Thanks for taking my questions.
First on the sensitivity to LME track on the cost side; I just wanted to confirm the only thing that still linked to aluminum price, is power and alumina in Iceland and alumina in Mt. Holly.
And that's the new contract that Hawesville won't have any linkage to aluminum price, is that right?
Logan Kruger
You're incorrect in Iceland. it's just toll.
It's a tolling facility, so there is a natural offset or hedge against it. But it's not part of the -- obviously Mt.
Holly is alumina comments on the ...
Wayne Hale
No, you absolutely correct. As Logan said, the implicit alumina cost in toll free (ph) and Iceland, ...
alumina in Mt. Holly and as you correctly said; I think it was a question; there is no linkage in the new power contract that Hawesville to the metal price.
It's a cost based contract, so we pay the cost of the power producers. So there is obviously linkage to their cost of coal and the cost of productions and material and all the other things, but no LME linkage.
Unidentified Analyst
Got it. And than second on the premium; is Midwest premium still the relevant number for your U.S.
operations or
Wayne Hale
Yes
Unidentified Analyst
Okay. So you're not sending a big part of your material directly to LME, in which case it might not get any premium.
Logan Kruger
The premium is relevant part for our business.
Wayne Hale
We're not sending any material for the warehouses.
Unidentified Analyst
Okay. Thank you very much.
Wayne Hale
Thank you.
Logan Kruger
Thanks for the question.
Operator
Next question comes from the line of ... Ghosh with ...
Group. Please go ahead.
Unidentified Analyst
Hi. Mostly ...
actually asked part of my question on the financing things, but just if I can ask you one more question on that. At this let's say $5, $5.5 Midwest premium.
I mean, just the math would suggest that that is enough to incentivize someone to break this Contango deal, which is call it 50, 60 bucks per tons minus the cost of financing that and the cost of storing in the warehouse.
Logan Kruger
Yup.
Unidentified Analyst
So, I mean, obviously, subject to the condition that the metal is not restricted, so the financing term is not fixed. So are you actually seeing any evidence of that, which is these high premiums incentivizing metal coming of these financing deals, and becoming freely available again.
So, in fact kind of a natural flattening of the Contango (ph)
Logan Kruger
Not seen that -- we don't play in that market as Mike has pointed out; we don't put metal into the warehouse. We just don't notice the dynamics around the premium.
But to answer your question; we are not close enough or have not seen that at this point in time.
Michael Bless
We're hearing the same rumors, speculation that you probably are. There is some speculation out there that yes, these fiscal (ph) premiums at the point where I might say; they break financing deal.
But as Logan said; we're just not -- the answer is no, we don't have any evidence of it.
Unidentified Analyst
Okay. Thank you
Logan Kruger
Thank you for the question. Hi, Operator, any more questions.
Operator
(Operator Instructions). We have a question from the line David Rosenberg with Oaktree Capital Management.
Please go ahead.
David Rosenberg - Oaktree Capital Management
Hi guys, it's David.
Logan Kruger
Hi, David.
David Rosenberg - Oaktree Capital Management
I guess the question I have for you guys is somewhat related to questions that was just asked is; historically you've always said the natural hedge is about 23% and now that we've had some curtailments in the Hawesville contract is no longer tied to aluminum prices. Can you refresh that percentage for us?
Logan Kruger
We all look at ... David so
Shelly Lair
Yeah, I don't think it really have moved our backlog. you've lost Ravenswood would had a percentage, but then Hawesville, which doesn't have a percentage linkage ...
percentage. So, I think that you're probably around the same level
Logan Kruger
There was no linkage to Hawesville, it has not changed. There was no -- you may be thinking that there was a sort of derivative or second stage linkage at Ravenswood power contact to the LME.
But as Hawesville, the power deal which strict before; now it's cost base.
David Rosenberg - Oaktree Capital Management
So we still think about it about 23% naturally hedged at about ...
Logan Kruger
Yeah, ... Shelly is not ...
Shelly Lair
You are right.
David Rosenberg - Oaktree Capital Management
Okay. That's all I have.
Thanks guys.
Logan Kruger
Thanks, David. Good question though.
Thank you.
Operator
There are no additional questions in queue. Please go ahead.
Logan Kruger
Thank you very much everyone for taking the time to look into us today. We certainly are pleased with the operating performance and cash situation and looking at our liquidity.
We continued to work very hard at improving the situation on all levels from the company and look forward to talking with you again soon. Thank you.
Operator
That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.